Sommers Company Is Evaluating a Project Requiring a Capital Expenditure

question 5

Essay

Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated life of 5 years and no salvage value. The estimated net income and net cash flow from the project are as follows:
$\begin{array}{ccc} \text {Net Cash}& \text { Net Income Flow}&\text { Year }\\\$ 120,000 & \$ 60,000 & 1 \\110,000 & 50,000 & 2 \\105,000 & 45,000 & 4 \\90,000 & 30,000 & 4 \\80,000 & 20,000 &5\\\underline{\$ 505,000}&\underline{\$205,000}\end{array}$
The company's minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% is shown in the table below:
$$\begin{array} { | l | l | } \hline \text { Present } \text { Value } & \text { Year } \\\hline \text { of} \$ 1 \text { at } 12 \% & 1 \\\hline 0.893 & 2 \\\hline 0.797 & 3 \\\hline 0.712 & 4 \\\hline 0.636 & 5 \\\hline 0.567 & \\\hline &\end{array}$$ Determine (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net present value.

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Definitions:

Quasi-experimental

A study design that resembles an experimental study but lacks random assignment of subjects to treatment or control.

Control Group

In experimental research, the group of participants that does not receive the experimental treatment, serving as a comparison to evaluate the effect of the treatment.

Self-compassion

The practice of being kind and understanding to oneself in instances of pain or failure.

Maleficence

The act of causing harm or evil to others.